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Lam Soon Trademark Ltd v Commissioner Of Inland Revenue

Judgment Cited authorities 9 Cited in Precedent Map Related
Vincent
Judgment Date30 June 2006
Year2006
Citation[2006] 3 HKLRD 132; (2006) 9 HKCFAR 391
Judgement NumberFACV29/2005
Subject MatterFinal Appeal (Civil)
CourtCourt of Final Appeal (Hong Kong)
FACV000029/2005 LAM SOON TRADEMARK LTD v. COMMISSIONER OF INLAND REVENUE

FACV No. 29 of 2005

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 29 OF 2005 (CIVIL)

(ON APPEAL FROM CACV NO. 279 OF 2004)

_____________________

Between:

LAM SOON TRADEMARK LIMITED

Appellant

and

COMMISSIONER OF INLAND REVENUE

Respondent

_____________________

Court: Chief Justice Li, Mr Justice Bokhary PJ, Mr Justice Chan PJ, Mr Justice Ribeiro PJ and Mr Justice Mortimer NPJ

Date of Hearing: 23 June 2006

Date of Judgment: 30 June 2006

_____________________

J U D G M E N T

_____________________

Chief Justice Li:

1. I agree with the judgment of Mr Justice Bokhary PJ.

Mr Justice Bokhary PJ:

Introduction

2. This is an appeal by a taxpayer, Lam Soon Trademark Ltd (“the Taxpayer”), against additional assessments to profits tax. Two questions on the operation of the Inland Revenue Ordinance, Cap. 112, arise. All my references to sections and subsections are to those of that Ordinance. The first question (“the preclusion question”) is as follows. Is the making of an additional assessment under s.60 precluded by tax having originally been assessed on the basis of what sections 15 and 21A deem and such original assessment having become final and conclusive pursuant to s.70? “Yes” submits the Taxpayer while the Commissioner of Inland Revenue submits “No”. The Board of Review, the High Court (Tang J, as he then was) and the Court of Appeal (Stock, Le Pichon and Yuen JJA) have all answered the preclusion question “No” in favour of the Commissioner.

3. As we shall see in detail when the circumstances of this case are examined, the original assessments were made on the basis of what sections 15 and 21A deemed, and became final and conclusive pursuant to s.70. So if we answer the preclusion question “Yes” in the Taxpayer’s favour, its appeal would succeed on the basis that there was simply no power at all to make the additional assessments.

4. But if we answer the preclusion question “No” in the Commissioner’s favour, then it would become necessary to consider the second question (“the voidness question”) which is as follows. Is an additional assessment rendered void by an assessor’s omission to deduct outgoings and expenses incurred in the production of chargeable profits? “Yes” submits the Taxpayer while the Commissioner submits “No”. The voidness question arises under a fallback argument which the Taxpayer has erected upon the fact that the additional assessments had been made without deducting outgoings and expenses incurred in the production of its chargeable profits. This fallback argument runs thus. It is ultra vires (i.e. beyond the scope of his powers) for an assessor to make an additional assessment without deducting outgoings and expenses incurred in the production of chargeable profits. And any additional assessment made without such deduction is void. So the additional assessments in the present case, having been made without such deduction, are void.

5. Rejecting the Taxpayer’s fallback argument, the Board of Review, the High Court and the Court of Appeal have all answered the voidness question “No” in the Commissioner’s favour.

6. Shortly stated the circumstances of the case are as follows. The Taxpayer is a company incorporated in the Cook Islands. It is part of the Lam Soon group which includes a company listed on the Hong Kong Stock Exchange. Acquiring trademarks and earning royalties by licensing the use of its trademarks are and have at all material times been the Taxpayer’s principal activities.

7. Section 14, which is the general charging provision for profits tax, provides as follows:

“(1) Subject to the provisions of this Ordinance, profits tax shall be charged for each year of assessment at the standard rate on every person carrying on a trade, profession or business in Hong Kong in respect of his assessable profits arising in or derived from Hong Kong for that year from such trade, profession or business (excluding profits arising from the sale of capital assets) as ascertained in accordance with this Part.

(2) In the case of -

(a) a corporation; and

(b) a corporation (‘relevant corporation’) to which a share of the assessable profits of a partnership is apportioned under section 22A and is charged in the partnership name under section 22,

profits tax shall be charged on the assessable profits of that corporation, or on that share of the assessable profits of that relevant corporation, as the case may be, at the rate specified in Schedule 8.”

Original assessments made

8. Originally the assessor was of the view that the Taxpayer had not been carrying on business in Hong Kong. So he did not think that s.14 applied, and he turned to sections 15, 20B and 21A.

9. Section 15(1) provides that certain sums “shall be deemed to be receipts arising in or derived from Hong Kong from a trade, profession or business carried on in Hong Kong”. By virtue of paragraph (b) of this subsection, such sums include “sums, not otherwise chargeable to [profits tax], received by or accrued to a person for the use of or right to use in Hong Kong any … trademark”. Sums thus deemed to be such receipts are among those described in s.20B(1) as the sums in respect of which a non-resident person is chargeable to tax. And s.20B(2) provides that “the non-resident person is chargeable to tax in respect of the sums described in subsection (1) in the name of any person in Hong Kong who paid or credited those sums to that or any other non-resident person”. At the time material to the present case, s.21A read:

“The assessable profits of a person arising in or derived from Hong Kong in respect of a sum deemed by section 15(1)(a) or (b) to be a receipt arising in or derived from Hong Kong from a trade, profession or business carried on in Hong Kong shall, for the purposes of this Ordinance and notwithstanding any other provisions of this Part, be taken to be 10 per cent of such sum.”

10. In each of the four years of assessment concerned, namely 1990/91 – 1993/94, sums for the use in Hong Kong of its trademarks were credited to the Taxpayer by a different Hong Kong company in the Lam Soon group. For those years of assessment the Taxpayer was assessed under sections 15, 20B and 21A to profits tax in respect of those sums in the names of those four Hong Kong companies. Such tax totals $18,918,612.

11. Those were the original assessments. They were not objected to, and in due course they became final and conclusive pursuant to s.70 which reads:

“Where no valid objection or appeal has been lodged within the time limited by this Part against an assessment as regards the amount of the assessable income or profits or net assessable value assessed thereby, or where an appeal against an assessment has been withdrawn under section 68(1A)(a) or dismissed under subsection (2B) of that section, or where the amount of the assessable income or profits or net assessable value has been agreed to under section 64(3), or where the amount of such assessable income or profits or net assessable value has been determined on objection or appeal, the assessment as made or agreed to or determined on objection or appeal, as the case may be, shall be final and conclusive for all purposes of this Ordinance as regards the amount of such assessable income or profits or net assessable value:

Provided that nothing in this Part shall prevent an assessor from making an assessment or additional assessment for any year of assessment which does not involve re-opening any matter which has been determined on objection or appeal for the year.”

Additional assessments made

12. Later on the assessor formed the view that the Taxpayer had been carrying on business in Hong Kong after all. This meant, without recourse to any deeming provision, that the assessable profits on the Taxpayer’s royalties arose in or derived from Hong Kong and therefore attracted profits tax under s.14. In other words, it meant that the 10% limit set by s.21A did not apply. Accordingly, within the time limited for doing so, the assessor assessed additional amounts under s.60 for the years of assessment 1990/91 – 1993/94 in order to make up the shortfall involved. These additional assessments total $10,552,717.

13. Those are the additional assessments to which the Taxpayer objected. The Commissioner made a determination disagreeing with the objection. Whereupon the Taxpayer appealed to the Board of Review against the determination. It so appealed on a number of grounds, including grounds going to the points raised by the preclusion question and the voidness question. The Board of Review rejected all the Taxpayer’s grounds, dismissed its appeal and confirmed the additional assessments. From the Board of Review the Taxpayer appealed by way of case stated to the High Court. The case stated posed a number of questions including questions to the effect of the preclusion question and the voidness question. Having lost in the High Court on all questions, the Taxpayer went to the Court of Appeal. In that court the Taxpayer contended for an answer in the affirmative to the preclusion question and, as a fallback, for an answer in the affirmative to the voidness question. Having failed in those endeavours in the Court of Appeal, the Taxpayer now renews them before us.

Duty to assess

14. The assessor’s duty to make assessments is laid down in s.59. This duty is to...

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